LAO Calls Out Flawed Housing Needs Process

Serious observers of California's housing supply crisis are beginning to question the validity of one of the fundamental pillars of the state's housing law regime: the methodology for determining the amount of "needed" new market rate housing units. Since 1980, housing element law has called for state governmental agencies to calculate the projected number of new housing units needed for each region in the state using a prescribed methodology. This regional housing needs allocation (RHNA) purports to represent the new housing supply necessary to create and maintain a healthy housing market providing adequate housing opportunities to people of all income levels. Yet over the years, the Bay Area has consistently exceeded the number of market rate units allocated to it through the various housing element RHNA cycles. This fact is often seized upon by those who argue that building significantly more market rate housing in the region will not help restrain housing costs because, according to the RHNA numbers, the region has built more than enough market rate housing yet housing prices continue to increase far greater than in other parts of the country. Because the RHNA numbers fit within the narrative that many in the Bay Area want to embrace--that there is no need for the region to increase market rate construction significantly, the RHNA numbers for market rate housing are taken as gospel and the validity of the RHNA methodology and results have not been systematically questioned.

Recently, however, the California Legislative Analyst published a housing research bulletin [attached] observing that during the current housing crisis, coastal metro areas in California are once again largely on pace to meet what the RHNA process has deemed to be their market rate housing needs, and suggesting that the RHNA methodology that so heavily influences housing policy and reform discussions in California needs fundamental rethinking: It is also notable that building levels in California remain low by national standards.

For example, as we pointed out in our November Fiscal Outlook, over the past year, the San Francisco–Oakland and San Jose metro areas (comprised of Alameda, Contra Costa, Marin, San Francisco, San Mateo, and Santa Clara counties) approved about 2.8 building permits per 1,000 residents. This was well below the national average among major urban areas of 3.9 permits per 1,000 residents. In addition, other urban areas with rapidly growing economies similar to the Bay Area—such as Austin, Houston, Portland, and Raleigh—approved over six permits per 1,000 residents during the past year.

Rather than suggesting that home building levels are sufficient in California’s coastal areas, the fact that permitting has kept pace with RHNA targets in these areas may suggest that these production goals do not reflect the full extent of demand for housing in these areas. Production goals likely need to be higher if the high cost of and intense competition for housing in these areas is to be curbed.